What is a micro, small, or medium-sized enterprise (MSME) and why do they matter for trade?
There is no universal definition of an MSME. Some economies categorize them by number of employees, some by annual turnover, others by assets, and still others by a combination of the above. Although there may be no exact agreement on what a MSME is, what is clear is that they are a large part of the global economy. Some estimates indicate that MSMEs account for roughly 60% of global employment, 50% of value-added, and 95% of enterprises worldwide (See the World Trade Organization’s (WTO) World Trade Report 2016 for more information). Additionally, when considering their number of employees, the majority of MSMEs are very small (or micro, less than 10 employees) enterprises. In some parts of the world, they can also be part of the informal sector.
International trade, and especially participation in global value chains (GVCs), has been shown to hold a number of advantages for participants, from input and market diversification to technology transfer and increased productivity. However, not all businesses have the same capacity to participate and there is a growing body of evidence showing that MSMEs need support to trade. For more research on this, see the WTO World Trade Report 2016: Levelling the trading field for SMEs, the International Trade Centre’s (ITC) SME Competitiveness Outlook: Connect, compete and change for inclusive growth, and the Organisation for Economic Co-operation and Development (OECD) and World Bank’s publication on Inclusive Global Value Chains).
Services are an important sector for MSME economic participation, especially as the digital economy continues to grow. MSMEs that supply services have been found to export earlier than manufacturing MSMEs, having relatively lower fixed costs to enter international trade (see WTO World Trade Report 2019: The future of services trade). Support for services trade through lowering barriers can be an important way to open trade opportunities for MSMEs.
The digital economy has many opportunities for MSME to begin to trade internationally. From “born global” firms to e-commerce, those MSMEs that digitalize have access to tools that can reduce business costs and facilitate trade. However, MSMEs remain much slower to digitalize, be it due to access to infrastructure, costs, or lack of digital know-how. For more information, see the ITC SME Competitiveness Outlook: Business Ecosystems for the Digital Age, OECD Digital Transformation of SMEs, and the United Nations Conference on Trade and Development’s (UNCTAD) Digital Economy Reports.
MSMEs are important for trade inclusiveness, especially when it comes to women. There are large gaps in trade participation between women and men-owned firms. Women-owned firms generally are smaller than men-owned firms, according to the WTO Women and Trade Report. Understanding the nexus between MSMEs, trade, and gender is important, especially given findings that women-owned exporting businesses pay more, hire more, and are more productive than their non-exporting counterparts (see ITC Unlocking Markets for Women to Trade).
Innovation is crucial for long term growth and development. MSMEs at the forefront of new business innovations can be more agile than large firms and more willing to experiment. However, on average MSMEs are less innovative than large firms according to work by the OECD. More policy effort is necessary in order to foster MSME innovation (see OECD Promoting innovation in established SMEs).